Roanoke Times
Copyright (c) 1995, Landmark Communications, Inc.
DATE: MONDAY, June 28, 1993 TAG: 9306280028
SECTION: BUSINESS PAGE: B6 EDITION: METRO
SOURCE: MAG POFF
DATELINE: LENGTH: Medium
My questions are:
1. I will probably want to sell the house within five years. At the age of 50 can I take my one-time capital gains deferment if I decide to rent or to purchase a house considerably less expensive than the one I will be selling.
2. Or do I have to be 65 to take this? At the age of 50 I will be down-scaling my lifestyle tremendously for the remainder of my life.
3. Also, does the house have to be in my name alone for three years prior to my selling it and being able to take this deferment? I have read this somewhere, and I need to know if we should go ahead and remove their names from the deed.
4. If we don't remove their names, at the time of their deaths would I be subject to taxes on the house? It is currently in all three of our names.
A: You don't say whether you own the house with survivorship rights. Nor is it clear whether you own half of the house or whether each of the three parties owns one-third.
J. Lee Osborne, lawyer with the Roanoke firm of Carter, Brown & Osborne, said your situation is covered by Section 121 of the Internal Revenue Code.
That provides a one-time exemption from capital gains on a home up to $125,000. You have to be 55 or older (not 50 or 65) to claim this exemption. You must have lived in the house for three of the prior five years, a condition you apparently meet by living there. If you own a half or third of the house, you can claim a half or third of the exclusion when you are 55.
Your parents presumably meet the age requirements and could claim the exemption for their share if you sell before then.
If your parents simply take their name off the deed, Osborne said, they would be giving you a gift of their equity in the home. They would have to file a gift tax return for the excess over the annual gift limit of $10,000, or $20,000 for the two of them. The amount of the excess then would be included back into their estates at their deaths. If the joint estate, with the excess gift, reached more than $600,000, the estate would pay heavy taxes at the time of the second death.
If they give you this gift, you would take their tax basis in the house. So the tax basis would be the same as it is now for the three of you: purchase price plus improvements.
If the house passes to you at their deaths, you would take a step-up basis to the value as of the date of each death.
If you all now own a third, in other words, your ultimate tax basis would be one-third at the original value and the other two-thirds at the value as of the dates of their deaths.
If you want to sell at age 50, Osborne said, the three of you could sell jointly then. Your parents could avail themselves of the one-time tax exclusion for their two-thirds (or half). You could pay taxes on the gain for just your share. Then your parents, if they wish, could give you the money subject to the gift tax and estate laws.
You should consult with a tax adviser, either a certified public accountant or a lawyer who specializes in estates and taxes, to review all of your alternatives before you take any action in connection with this house.
Taxes, however, should be only one of many items you consider when it comes to questions of how you want to live. Lifestyle is not totally a financial decision, especially when it comes to down-scaling.
\ Figuring Social Security benefits
Q: Is it true that the more I earn the last two or three years before retirement, the more I'll draw in Social Security each month?
A: Yes, it's true.
The usual way of determining the monthly benefit is to average annual income for all years starting in 1951, then drop out the five lowest years. Higher income, which usually comes at the end of a career, helps to boost the monthly benefit.
There is a ceiling for the benefits, however. This year, the maximum payment is $1,128 a month or $13,536 for the year. That amount goes up each year with the cost of living.
Additionally, your benefit also rises the more years you work. People who retire at 62 take a 20 percent cut in monthly benefits. This rises each year to full benefits at age 65. Even then, monthly payments go up 4 percent a year for each year you work beyond the age of 65.
\ AUTHOR Mag Poff will help find answers to your personal finance questions. Send them to her at the Roanoke Times & World-News, P.O. Box 2491, Roanoke 24010.
by CNB